Tripoli University is to ask the London School of Economics to return the £1.5m pledged by the deposed dictator's son Saif al-Islam Gaddafi, who obtained his PhD there.

University officials have told the Guardian that the money was stolen from the Libyan people and should be either reimbursed or used to fund scholarships for Libyans studying in the UK.

LSE faced furious criticism over its links with the Gaddafi regime, leading to the resignation of its director, Sir Howard Davies, though only £300,000 of the money had been paid out. "I am sure they will co-operate with us," said Khaifa Shakreen, Tripoli University's head of international relations.

The LSE said on Wednesday that it had earmarked the £300,000 for bursaries for north African students.

The university faced huge embarrassment shortly after the start of the uprising in February when Saif warned of "rivers of blood" if protests against his father's regime continued. "We'll fight until the last man, the last woman, the last bullet," he pledged.

Many Libyans believe he is now hiding in Sirte or Bani Walid, where fierce battles are still raging between loyalists and the victorious Nato-backed rebels.

An independent inquiry headed by Lord Woolf, a former lord chief justice, is examining the LSE's relationship with Libya and with Saif.